Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week mixed as more economic optimism, equity fund inflows, seasonal strength, buyout speculation and short-covering offsets profit-taking, rising sovereign debt angst and China inflation worries. My intermediate-term trading indicators are giving mostly bullish signals and the Portfolio is 100% net long heading into the week.

Weekly Outlook

U.S. Week Ahead by MarketWatch (video).
Wall St. Week Ahead by Reuters.
Stocks to Watch Monday by MarketWatch.
Weekly Economic Calendar by Briefing.com.

BOTTOM LINE: I expect US stocks to finish the week mixed as US debt ceiling concerns, global growth worries and emerging market inflation fears offset short-covering, less financial sector pessimism and technical buying. My intermediate-term trading indicators are giving neutral signals and the Portfolio is 100% net long heading into the week.

Stocks Slightly Higher into Final Hour on Declining Long-Term Rates, More Economic Optimism, Seasonal Strength, Technical Buying

Broad Market Tone:

• Advance/Decline Line: About Even
  
• Sector Performance: Most Sectors Rising
  
• Volume: Light
  
• Market Leading Stocks: Performing In Line
  

Equity Investor Angst:

• VIX 17.87 +2.0%
  
• ISE Sentiment Index 120.0 +18.81%
  
• Total Put/Call .94 +32.39%
  
• NYSE Arms .95 -18.90%
  

Credit Investor Angst:

• North American Investment Grade CDS Index 85.18 +.04%
  
• European Financial Sector CDS Index 152.60 bps -4.1%
  
• Western Europe Sovereign Debt CDS Index 204.83 bps unch.
  
• Emerging Market CDS Index 200.28 -1.07%
  
• 2-Year Swap Spread 20.0 +1 bp
  
• TED Spread 18.0 -1 bp
  

Economic Gauges:

• 3-Month T-Bill Yield .12% +1 bp
  
• Yield Curve 270.0 -1 bp
  
• China Import Iron Ore Spot $170.10/Metric Tonne unch.
  
• Citi US Economic Surprise Index +14.60 -.1 point
  
• 10-Year TIPS Spread 2.28% -1 bp
  

Overseas Futures:

• Nikkei Futures: Indicating +2 open in Japan
• DAX Futures: Indicating +13 open in Germany

Portfolio:

• Slightly Higher: On gains in my Medical and Ag long positions
  
• Disclosed Trades: None
  
• Market Exposure: 100% Net Long

BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 trades slightly higher despite recent stock gains, some weakness in European equities and China inflation worries. On the positive side, Gaming, Oil Service, Alt Energy, Ag, Telecom, Wireless, I-Banking, HMO, Homebuilding and Road & Rail shares are especially strong, rising more than .5%. Cyclicals are outperforming. Copper is jumping another +1.74% and the S&P GSCI Ag Spot Index is rising +2.28%. The 10-year yield is falling -7 bps to 3.29% despite recent positive economic data, the rise in commodities and "hot" prices paid readings. Put/call readings for the broad market are showing more bearishness today, which is a positive. The Shanghai Composite surged +1.76% last night, finishing at session highs, and is now back above its 200-day moving average. The Belgium sovereign cds is falling -3.17% to 217.93 bps and the UK sovereign cds is declining -5.57% to 72.41 bps, which are also positives. On the negative side, Education and Internet shares are under mild pressure, falling more than .5%. The Euro Financial Sector CDS Index remains near its highest level since mid-June and the Western Europe Sovereign CDS Index is right at a record high, despite the recent bounce in the euro currency. The broad market continues to trade in a healthy fashion as it grinds slowly higher and then consolidates. One of my longs, (AAPL), is resting after its recent run to record highs and +52.8% gain YTD. I still see further significant upside in the shares from current levels longer-term and expect the stock to strongly outperform the S&P 500 again next year. I expect US stocks to trade mixed-to-higher into the close from current levels on seasonal strength, short-covering, technical buying, lower long-term rates, less financial sector pessimism, more economic optimism, buyout speculation and investment manager performance angst.

Today's Headlines

Bloomberg:

• Credit-Default Swaps Little Changed on Last Trading Day of 2010. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.1 basis point to a mid-price of 85.2 basis points as of 10:49 a.m. in New York, according to index administrator Markit Group Ltd. The index, which typically rises as investor confidence deteriorates and falls as it improves, has declined from 99.4 basis points on Nov. 30.
• Corn, Soybean Prices Head for Best Second-Half Performance in 50 Years. Corn and soybeans rose, heading for their best second-half performances in at least five decades, as stockpiles tumbled and adverse weather threatened crops in South America. U.S. corn inventories before next year’s harvest will decline to the lowest since 1996 and global consumption will outpace supplies for a second year in the season ending Aug. 31, U.S. Department of Agriculture data show. “Damage is occurring daily and it is irreversible,” said Jim Gerlach, the president of A/C Trading Inc. in Fowler, Indiana. “These prices have not slowed demand.”
• Copper Advances to Record on Speculation Supply Shortage Poised to Worsen. Copper futures rose to a record for the fourth time this week as speculation heightened that a supply deficit will widen as China, the world’s biggest consumer, leads a rebound in demand for industrial metals. The price reached an all-time high of $4.432 a pound as the global economy recovered from its deepest recession since World War II. Supplies of copper, used in wiring and pipes, will lag behind demand by 825,000 metric tons next year, almost double this year’s deficit of 449,000 tons, Barclays Capital says.
• Cotton Futures Poised for Biggest Yearly Gain Since 1973 on China Demand. Cotton rose, heading for the biggest annual gain since 1973, as inventories plunged, adverse weather damaged global crops and demand surged in China, the world’s biggest user. Stockpiles monitored by ICE Futures U.S. tumbled 72 percent in 2010, the biggest annual decline since at least 2003, when the data begins.
• CVS(CVS) to Buy Universal American Unit for $1.25 Billion. CVS Caremark Corp. agreed to buy the Medicare Part D unit of Universal American Financial Corp. for about $1.25 billion, more than doubling the size of its program after pharmacy-benefits management sales fell for two quarters.

Wall Street Journal:

• Portugal Confident on Debt Program. Portugal has the means to resolve its financing problems through ambitious targets to cut public debt and to put public finances under control, the country's Minister of the Presidency Pedro Silva Pereira said Thursday. "We are confident in the capacity of the Portuguese economy to confront the current situation,"Mr. Pereira told reporters after a cabinet meeting, rejecting any notion that the country may be forced to seek European Union aid early next year, as many economists fear.

Zero Hedge:

• Is The Treasury Selloff Over - Net Money Flows Into The TSY Complex, At Year Lows, Are Starting to Rise. (graph)
• New Year's Eve Poll: What Issue Will Dominate (Actionable) News Flow in 2011?
• Debunking Krugman(Again): On The Shift From Net to Gross Income Tax Basis. It seems anywhere one looks there days, one reads a refutation of Paul Krugman's tortured "economist" logic. Lately, the NYTer has fallen into the crosshairs of many due to his contention that currently taxes, based on some chart which the Nobelist probably mislabeled again, are at 20th century lows. Of course, cherrypicking data that fits the theory is precisely what economists do. Which is why Krugman may be excused for missing out on a trend so subversive that we have seen it only mentioned by tax attorneys at Weil Gotshal: namely the gradual transition in the definition of taxable income from a "net" to a "gross" tax basis. As Weil's Kimberly Blanchard explains:

New York Times:

• Academic Economists to Consider Ethics Code.
• High IPO Fees Weigh on U.S. Firms, Study Finds. American companies could save more than $1 billion a year if banks charged the same fees for initial public offerings as banks do in Europe, according to a new study by three British academics.
• E.P.A. Limit on Gases to Pose Risk to Obama and Congress. With the federal government set to regulate climate-altering gases from factories and power plants for the first time, the Obama administration and the new Congress are headed for a clash that carries substantial risks for both sides. “These are hand grenades, and the pins have been pulled,” said William K. Reilly, administrator of the environmental agency under the first President George Bush. He said that the agency was wedged between a hostile Congress and the mandates of the law, with little room to maneuver.

Washington Post:

• Government by Regulation. Shhh. Obama knows he has only so many years to change the country. In his first two, he achieved much: the first stimulus, Obamacare and financial regulation. For the next two, however, the Republican House will prevent any repetition of that. Obama's agenda will therefore have to be advanced by the more subterranean means of rule-by-regulation. But this must simultaneously be mixed with ostentatious displays of legislative bipartisanship (e.g., the lame-duck tax-cut deal) in order to pull off the (apparent) centrist repositioning required for reelection. This, in turn, would grant Obama four more years when, freed from the need for pretense, he can reassert himself ideologically and complete the social-democratic transformation - begun Jan. 20, 2009; derailed Nov. 2, 2010 - that is the mission of his presidency.

Boy Genius Report:

• Citibank(C): Apple's(AAPL) App Store Will Generate $2 Billion in 2011. And if research firm Gartner’s forecasts are accurate, that number could be low. Gartner believes the global app market in 2010 totaled $4 billion, and that revenues will climb to a staggering $27 billion over the next two years.

Minyanville:

• 11 Post-Christmas Ruminations on Apple(AAPL) and the iPad.

Commentary:

• The WikiLeaks War on America.

Politico:

• Climate PR Effort Heats Up. Hey America! Are you ready to get wonky on global warming? After a year that started with fallout from the “Climategate” e-mail release, saw the cap-and-trade bill die in Congress, and ended with a gang of Republican climate skeptics winning House and Senate seats, global warming experts are going back to basics.
  Environmentalists, scientists and lawmakers have renewed public relations efforts to put global warming plainly before Americans' eyes. "Folks are enraged about this, rightly so, and are looking for ways to educate," said Peter Frumhoff, director of science and policy at the Union of Concerned Scientists.

Reuters:

• Molycorp(MCP) In Talks With More JV Partners: CEO. The top executive of rare earth mining company Molycorp Inc (MCP.N) said on Thursday his company is in discussions with a number of potential joint venture partners and customers scrambling to find other suppliers of the critical minerals in the wake of China's supply cut. In an interview with Reuters, Molycorp Chief Executive Mark Smith said the company was "absolutely" in negotiations to reach deals similar to the ones it announced earlier this month with Hitachi Metals Ltd (5486.T) and Sumitomo Corp (8053.T).
• Greece in Talks on Extending Debt Repayment. Greece is in talks with commercial banks on extending the repayment of its outstanding debt, in line with a similar plan to stretch out paying back its EU/IMF bailout, an Athens weekly reported on Friday.
• Global Stock Fund Inflows Gain, Bonds Slow - EPFR. Money flows to global equity and other stock funds accelerated during the fourth quarter, signaling a possible twist in 2011 from the record investments made in bond portfolios over the last year, according to a report published by EPFR Global on Friday.
• Hedge Funds Offered Weak Returns in 2010. Hedge funds often claim to offer strong returns that are not correlated with broader markets, but in 2010 many failed on both of those counts. That failure came in large part because hedge funds cannot make as many bets with borrowed money, analysts said. Hedge funds on average returned just 4.52 percent this year to December 28, according to Hedge Fund Research's HFRX index. That is short of the FTSE 100's .FTSE 10.5 percent jump or the Standard & Poor's 500 Index .SPX 12.7 percent rise.
• Goldman(GS) Looks Set to Win in M&A Photo Finish.
• Americas Market Holidays to December 2011.

MailOnline:

• Blockbuster Deal Coming to IMAX. The curtain on a mergers and acquisitions boom could go up early in 2011. Wall Street and IMAX could light the blue touch paper because red-hot rumours suggest that the giant screen movie operator is attracting the admiring glances of Sony Corporation. Whispers that the Japanese multinational conglomerate is prepared to pay north of $40 a share lifted IMAX stock $0.62 to $26.23 in early trade yesterday.

Kathimerini:

• Greece plans to gradually reduce the size of the public sector by 30%, starting with the redeployment of tens of thousands of state employees, who will change roles and departments in the first six months of 2011. The transfers, part of an efficiency drive, will affect workers in state-owned enterprises as well as those employed directly by the state.

DigiTimes:

• Solar Cell Spot Prices Continue Slide in December. Solar cell spot prices have slid to US$1.20-1.25/W in December 2010, down from a peak of US$1.40-1.43/W in November, according to industry sources. Prices continued to be dragged down by seasonality and new capacity at suppliers. The downward price trend will likely hurt revenues performance of solar cell companies in December, the sources claimed. Some unspecified solar cell makers have admitted that December revenues will not be able to remain at high levels, due to falling demand and prices. They expect to manage single-digit drops sequentially through effective quote reductions.

Bear Radar

Style Underperformer:

• Mid-Cap Growth (-.26%)

Sector Underperformers:

• 1) Education -1.42% 2) Disk Drives -.93% 3) Biotech -.47%

Stocks Falling on Unusual Volume:

• MELI
  

Stocks With Unusual Put Option Activity:

• 1) SVNT 2) IOC 3) REE 4) MBI 5) RIG
  

Stocks With Most Negative News Mentions:

• 1) CBS 2) GPS 3) DGX 4) ODFL 5) FDML
  

Bull Radar

Style Outperformer:

• Mid-Cap Value (+.18%)

Sector Outperformers:

• 1) Gaming +1.36% 2) Gold +1.06% 3) Agriculture +.46%

Stocks Rising on Unusual Volume:

• USMO, GIB, IMAX, SCOK, AFOP, ENSG, CH, MBI, SQM, GIB, CSS, MPR and APC
  

Stocks With Unusual Call Option Activity:

• 1) IMAX 2) WM 3) SVNT 4) MBI 5) XME
  

Stocks With Most Positive News Mentions:

• 1) JCI 2) TMK 3) CVS 4) GOOG 5) VZ